Fundamentals of Financial Management

Abstract

The 2008 financial crisis hit the company hard almost seeing it out of market. The Federal Reserve reacted by introducing both short term liquidity steps and liquidity facilities to stabilize things. The government was reacting in a bid to see such companies as Goldman Sachs remain on their toes despite the existing unfavorable conditions. Gold Man Sachs benefited from this initiative by receiving a loan of $589 billion with them providing security such as market securities and mortgage based investments. The Primary Dealer Credit Facility and the Term Securities Lending Facility. The former loaned Goldman Securities $589 while the latter loaned them $782 billion. (Plunkett, 2007)

Financial Management Essay Example

The management of the company was solely to blame in the financial crisis. They failed to exercise due diligence and care in dispensing their duties. This saw other competitor firms take advantage of the rather volatile situation and ground themselves in place of Goldman. The company was also severely involved in using its assets in acquiring loans with other financial institutions. This saw the company almost collapse with huge debts being the snare it was facing. This also resulted into its stocks significantly dropping with investors avoiding it. The reason for this crisis that resulted into the near collapse of the company was the purchase by the institution of more illiquid assets. The growth rate of these assets was 24%. This is way less the amount from the previous year’s holdings whose growth rate was at around 39%. Liquid assets were down by about 9% (Ellis, 2008)

By holdings we are talking about mortgage backed securities, other asset backed securities and loans, debts that yield highly and also investment in private equity and funds.

The shares for example had reached a peak of $242 but they have greatly reduced to about $52 in November 2008. This crisis saw a drop in its business trading which in turn has caused a net decrease in income. The slump in underwriting may also have caused this reduction in net income. The company is however trying to rebound from increased trading in currency, commodities trading and fixed income. The bank implemented the strategy of closing a proprietary trading unit called Goldman Sachs Principal strategies. This was in response to a policy that checks on banks by setting limits of trading in their account. This has seen them recuperate from the financial blow. The bank also happened to have been sued in court over fraud which led to it paying $550 to settle the suit. (Litterman, 2003 p4)

The government decided to step in and help the situation. Goldman is a company with whom a lot of interest from the government is vested. The company provides very important services and has therefore contributed significantly towards the success of the American Economy. The bank also offers employment to majorities of Americans making it preferable. The government of the United States could not allow its stagnation over money matters. The bank has in the recent past had a number of controversies. These have often made it lag behind in the highly competitive market. Some of the cases in the courts are still pending. It has also been put under investigation with claims of unknown ultra vires deals (Jones, 2010) In April 2010, the Securities and Exchange Commission declared a suit against Goldman Sach and one of its employees. The Securities and Exchange Commission was launching a complaint against the company on the basis that the company had omitted and misstated certain figures in the documents of a synthetic CDO product.

Gold had been paid about $15 million to perform the job satisfactorily and this closed the deal. The complaint was that Goldman had lied in their presentation to investors that a selection agent by the name ACCA had reviewed the mortgage package. They also alleged that the company failed to disclose that Paulson and Co. which was supposed to help select a package had sought to shorten the package against which it planned to bet. SEC also alleged that Toure the employee mislead ACA in believing that Paulson invested about $200 million in the shareholding of ABACUS 2007. It was evident that Paulson’s intentions conflicted what he had actually promised to accomplish for the client firm, in this case ACA. Allegations had it that Paul made $1 million from the short duration of financial transactions. Material purchasers ended up losing a similar amount. ABN investors and IKB Deutsche Industries bank lost the said amounts. (Goldman Sachs: Investment Banking)

This suit affected the Stocks of the company greatly with potential investors avoiding it like a plague. The situation worsened when the US attorney General launched a probe against the company. Goldman however defended itself and termed the law suit as founded on the basis of malice and fallacies. The company stated clearly that it did not have a case to answer because it had disclosed all the relevant information to the clients. It also stated that it had not misled a single client (Goldman Sachs: the culture of success). In July 2010 however, the company decided to pay the government and the investors to settle SEC. It also agreed to change some of its practices regarding management of mortgage investments such as the design of marketing (Jones, 2010)

A report released in April 2011 stated that Goldman could have actually misled investors and itself profited from the scandal. Experts maintain that the company is liable in the face of law. Another controversy is one relating to California Bonds. The Los Angeles Times Reported that  Goldman Sach had benefited by swindling a huge sum of money from clients who it had advised to short California bonds (Managing to the New Regulatory Reality: Doing Business Under the Dodd-Frank Act)

It has also been alleged that the bank’s level of independence is wanting. This is because many of the former officials and senior members of the US government are now working with the corporation. This is seen as conflict of interest. It is actually alleged that Obama himself has lately received $1 million dollars from the bank and this act cites lack of independence.

It has also been lately alleged that Goldman Sach is behind the almost creeping economy of Greece. This is because the bank conspired with the Greece government to conceal the actual figures of its debts. This was to encourage members of the public to purchase bonds from the government looking towards a very stable economy (National register, 1991 p 98) the results of this move have been overwhelming on the part of the economy which has lately become very unstable resulting from high values of bonds. This has also been a problem affecting other European countries. (Brigham and Houston, 2009 p 34)

The Director of Goldman has recently been named in an insider deal. The director had received a huge amount of money from a billionaire of the Galleon Group. The director had lied to the billionaire that he would not be seeking re-election to the seat of director again. SEC has charged Gupta, the then director on counts of misleading the billionaire and claiming that Gupta was doing it for his own interest at the expense of the company’s interest (Jones 2010 p 67)

In April 2009, there was the issue of Goldman Sachs had increased its Q1 earnings by creating a December fake month  into which it fixed various write downs. The firm reported a $780M net loss for the single month of December in its first quarter.  It also depicted Q1 net earnings of $1.81B between January and March. (Goldman Sachs: The Financial Giant)

The accounting change on the fiscal year created the stub month and this was required when the firm was required to convert to a bank holding company. It included Item 5.03 of its Form in U.S. Securities and Exchange Commission filing of December 15, 2008.The December loss also included a $850M. This was written as a bad debt in regard write to a chemical maker who had gone bankrupt.  This move was completely misleading because the said chemical dealer was declared bankrupt way later in January. This was a scheme by Goldman Sach to increase its expenses and thus appear like it had made significant loses. This worked to the detriment of the company. (Plunkett, 2007)

Most financial analysts and the mainstream financial press, aware of the accounting change and deteriorating market conditions into December, were not amused by the December loss.  This lack of surprise and concern at the same time saw a result that was widely expected.  It is thought that this result may have contributed to the surprise. This portrayed the intention of the firm to hide the loses in December earnings release document. (Sax, 1992 p74)

The company still holds to the fact that what it exposed as net to AIG was not material in any way.  It maintains that the firm was protected against hedges. The cost of these hedges was estimated to be about $100M. It was claimed that both the collateral and CDS should have acted as protection to the institution against loses. Considerable speculation remains that Goldman's hedges against their AIG exposure would not have paid out if AIG was allowed to fail. Finally, the report said an AIG default would have forced Goldman Sachs to bear the risk of declines in the value of billions of dollars in collateral debt obligations (Miller, 2010 p 49)

A former director of Goldman Stephen Fieldman was named Chairman of the Federal Reserve Bank of New York in January 2008. The man had continued to be a shareholder in the bank even after retirement.   To many, this appeared to be a case of conflict of interest. Majority say that the man will not uphold standards of independence considering the fact that he too is also a shareholder in the firm.

Cash and cash equivalents have gradually reduced compared to last year’s figures. This may be explained by the fact that the company’s debtors have increased thus reducing the value of cash sales. The company may also have used the cash to acquire more assets as reflected on the balance sheet.  The value of debtors has increased this year due to increased levels of credit sales. The business seems to be performing better from the recorded figures in terms of sales.

The company’s quarterly balance sheets also reflect that the total assets of the company increased this year from the previous year’s value of assets.   The value of creditors also increased from last year’s figures and this reflects an increase in credit purchases.  This means the bank’s financial position is higher reflecting it creditworthiness. This also shows that the bank is buying more on credit terms. The value of long term debts are is lower this year as compared to last year. This implies the company has tried as much as possible to settle any loans it had as well as the related value of interest. (Ellis, 2008)

The company’s value of retained earnings also shows a gradual increase this year as compared to the last financial year of 2010. This implies the company’s management is sensitized on issues to do with future expansion. It also reflects stability and so implies the bank is a going concern. The bank also increased its credit level with the central bank. This implies the company is growing in terms of customers and deposits and therefore it is required to keep a higher amount of deposits with the central bank. The company’s current liabilities however increased as a result of the bank borrowing more from financial institutions and creditors. This also reflects growth such that the company is able to offer reasonable values for security. (Miller, 2010)

Stock holders equity reduced as seen from the balance sheet meaning more shareholders relinquished their shares for money. These stocks were bought back by the company (This analysis has been done personally by me).

The company invested less in securities this year as compared to last year as shown in the income statement. This could be because the bank spent more money in acquiring assets and building business acumen. It could also be that the stability of bonds was not a guarantee. The bonds may also have been costing too much at the time thus the bank did not want to commit its money to the same. The bank paid more to customers this year with regard to interest for their deposit. It may be because the bank increased its interest rate for deposits so as to encourage customers to save with them. The banks customer’s interest on deposits reduced in the latest quarter ending June. This reflects that there were fewer amounts received as deposits as compared to the previous periods. The bank also received less income from securities. This is because the bank had sold off some securities to boost its liquidity position. This is what had earlier led to an indication of increased cash short term funds. The bank increased the value of short term debts that it extended to customers.  Customers have resulted to borrowing more of short term funds to fund their investments without engaging in way too risky long term finances. (Jones 2010 p 157)

The bank also allowed more long term debts. This is mainly to big companies to allow for future expansion. It was important for the bank to give more of such. The bank paid less amount of salaries and wages this quarter as well as the employee benefits. This is because the previous quarter had seen an escalation for salaries and wages paid. The management of the bank had to lay off some staff seeking to reduce the amounts being paid as salaries and wages. The bank also paid less for its occupancy. This may be explained by the fact that the bank had acquired more assets of its own therefore reducing the amount relating to rent and occupancy significantly. The bank also paid more for promotions and advertising this quarter as compared to the last quarter. This is because the bank had increased its marketing campaign so as to reach a larger number of customers and thus expand its image. This inevitably saw the need to invest more on advertisements and promotions. The bank paid fewer dividends to its shareholders. This move was aimed at reducing expenses for the bank. This is to increase the value of net profits.

Conclusion

The bank should have avoided dealing with illiquid assets, as this would have put it in a safer position. Dealing in more illiquid assets means they take time to generate revenue and the same would have been were it to go on liquidation. It is paramount that in the future the bank works with more liquid assets. This will increase the net-income to the company which in turn will see an increase in stocks and their value since customers will be more attracted to it.

The management of the bank as well as the staff must also ensure they exercise due care and skill. They must also avoid at all costs being involved in schemes that will see the bank getting sued. This has in the past cost it large amounts of money in settling court cases.